Archive for April 2012
Backward industrial sector is the second major sector of the economy of Pakistan. Industrial sector plays an important role in the development process of any country. Manufacturing is secondary economic activity after agriculture.
Origin & History:
Since the latter part of the 18th century manufacturing as a human occupation got much importance. The modern concept of industry-manufacturing goods began in Great Britain in the late 18th century.
PROBLEMS OR CAUSES OF INDUSTRIAL BACKWARDNESS:
Causes of industrial backwardness may be divided into following four major categories:
1) The Policy of British Rulers
There were no favours for the Muslims due to British government, before independence in the sub-continent. British exported the raw material at cheaper rate to Britain so that the industrialization process in the sub-continent is to be stopped.
2) Lack of Technical Knowledge
Modern technology was introduced in the beginning of 20th century. British used the modern methods of production in Britain. But in sub-continent they used old method of production in all the manufacturing units. So, quality and quantity of production was very low it creates a bad view of our industry at world level.
3) Industrial Share
Before partition, there were 921 total industrial units in sub-continent. But out of 921 industrial units, Pakistan got only 34 industrial units that are just 3.69 % of total industrial share. Accordingly, we started our economy without industrial sector.
4) Disputable Industrial Strategy
It is a huge barrier in the way of industrial advancement. In the history of Pakistan, there was a policy of import substitution, in the early 1950s. There was a trend of industrialization in the 1960s. The policy of Nationalization was adopted in Z. A. Bhutto’s period and Zia-ul-Haq adopted the policy of Privatization. The investors are always hesitant to make investment in such situations.
5) Lack of Mineral Resources
There is acute shortage of mineral resources like oil and coal etc. These resources are necessary for industrial development. Due to lack of mineral resources, rate of industrial development in Pakistan is very low. Contribution of natural resources to GDP is 0.8 % in Pakistan.
6) Low Investment and Low Savings
Deficiency of capital is one more major problem in the way of industrial development. Pakistan is fundamentally, underdeveloped and there is shortage of capital in the country. Industrial development is impossible without capital. Sufficient capital is a major condition for industrial development. Total investment and domestic saving are 13.4% and 9.5% of GDP respectively.
7) Lack of Technical Know-how
There is lack of technical and skilled workers in the country due to high rate of illiteracy. Efficiency of labour is very low due to use of backward and orthodox technology. It is also a main cause of industrial backwardness.
8) Lack of Infrastructure
The infrastructure for industrial development is necessary. There is shortage of infrastructure in Pakistan. For example, gas, electricity, transport, roads, railways network and communication are not available up to the requirement of industrial development.
9) Inflationary Pressures
Rate of inflation is very high in Pakistan. The prices of imported machinery, oils, chemicals and spare-parts are rising very sharply. These factors contribute toward industrial backwardness. Very high rate of inflation is 14.1 % in Pakistan.
10) Inadequate Industrial Credit
There is shortage of active financial institutions in Pakistan, which may provide credit services to industrialists according to their needs. Terms and conditions for the provision of credit are so tight.
11) Unfavourable Industrial Structure
There are inequalities in industrial growth in Pakistan. Manufacturing of consumer goods is preferred over capital goods. No doubt, return on consumer goods is more but capital goods are necessary for economic development.
12) Limited Market for Capital Goods
The narrowness of domestic and foreign markets for the industrial goods is also a major hurdle in the way of industrial development. Small size of market is due to low purchasing power, low standard of goods and high cost of production etc.
13) Lack of Industrial Consultancy Firms
The investment in modern industries is not only costly but also risky. The capitalists are regularly withdrawn and hesitant in investing their capital in new industrial ventures. No doubt, deficiency of capital is a problem in Pakistan but the major problem is that existing capital is not properly utilizing due to lack of consultancy firms.
14) Lack of Industrial Research
Research work for industrial sector is not satisfactory due to lack of technical education and shortage of technological universities in the country. Improvement in production and reduction in cost of production is impossible due to lack of research. Number of technical and vocational institutions in Pakistan is more than 1522 out of which 1140 are in public sector. These are providing training to 3,00,000 persons.
15) Frequent Breakdown of Electricity
Like other power resources, electricity is also insufficient in Pakistan to meet the domestic needs. There is irregular supply and frequent breakdown of electricity in Pakistan. It is affecting the industrial production in the country. Growth rate of electricity and gas sector, in Pakistan is -21.1%.
16) Economic Sanctions
Advanced countries are not willing in the improvement of backward countries. They have created various trade zones among themselves. As a result, they import and export among themselves. So, export volume of developing countries remains very low. On the other hand, developed nations have imposed various sanctions on import and export with poor nations.
17) Global Recession
The global economic recession in the last years adversely affected the growth of manufacturing sector. The donor countries usually interfere in our internal affairs and economic activities in the time of recession.
18) Adverse Balance of Payment
Adverse balance of payment is a new cause of industrial backwardness. To make industrial development, we have to import modern machinery and advanced technology from other countries. But due to shortage of foreign exchange, we cannot import such items to make rapid economic development. Pakistan is facing the deficit of $ 8.3 billion in its balance of payment during 2010-11.
19) Lack of Education
People have no idea how to set up the industry due to high degree of illiteracy. They have no sufficient resources to start heavy projects. Efficiency of unskilled, untrained and illiterate labour is very low that causes in industrial backwardness. Literacy rate is just 57.7 % and expenditures on education sector are only 1.8 % of GDP, which is lowest in Asia.
20) Faith & Fate
Man should work hard first and then put the result in the hands of ALLAH. Mostly, our people are irrational, they believe on faith and fate. They do not want to take the risks. They are working just to meet their basic needs. There is absence of commercial mind in Pakistan.
Corruption is a great evil, which is still increasing at very high rate in Pakistan. It is found in government as well as private sector also. Due to corruption, illiterate and dishonest workers come forward and cause industrial backwardness. Pakistan is at number 34th at the table of the most corrupt nations and at number 1st in South Asia.
22) Climate and Weather
Climate and weather conditions are also a big cause of backwardness in various industries. There is inter-relationship between industrial and agricultural sector. If weather is not well, it causes agricultural backwardness and it results in industrial backwardness.
23) Cultural Disturbance
The cultural disturbances in the country have slow down the production in manufacturing sector. In addition to this, shortage of raw material has an adverse effect on production. There are various caste systems in the country.
24) Political Instability
An additional cause of industrial backwardness is political instability. Since partition, political situation of Pakistan is not satisfactory. There are regular changes in the governments and government policies. Domestic as well as foreign investors feel risk in making investment due to political unrest. All these result in industrial backwardness.
25) Kashmir and Water Issues
Since freedom, the Kashmir problem has been disturbing our economy. People in Pakistan remain worried about the danger of war with India due to Kashmir and water issues. So, Pakistani and especially foreign people hesitate to invest.
26) Burden of Refugees
At the time of partition, Pakistan had to face a serious problem of refugees coming from India and there was shortage of resources in Pakistan. But now Pakistan is also facing this problem in the form of Afghan refugees.
27) Wars with India
The two big wars fought in opposition to India in 1965 and 1971. It creates a lot of economic problems. Now situation is that both Pakistan and India has to keep up a huge part of their budget for defense.
MEASURES OR SUGGESTIONS TO IMPROVE INDUSTRIAL SECTOR:
The following measures are suggested to improve industrial sector of Pakistan:
1) More allocation of funds for industrial research is required, which is necessary, for the industrial development.
2) Industrial sector can be promoted by increasing capital.
3) Saving and investment should be increased to develop industrial sector.
4) To promote industrial sector, there should be technical know-how.
5) Tax concession is also needed to increase the investment in new industries.
6) In time supply of raw material is necessary for the improvement of industrial sector.
7) Advanced infrastructure is necessary for industrial development of Pakistan.
8) Financial institutions should provide credit facilities to industrial sector at flexible terms and conditions.
9) There should be expansion of markets, at domestic and foreign level, of industrial goods.
10) Foreign investment should be encouraged; more incentives should be given to investors.
11) Political stability is compulsory for the development of industrial sector.
12) High degree of technical education is required to produce skilled, technical and efficient work force.
13) Problem of load-shedding and irregular supply of electricity should be removed.
14) Commercial policy and self-reliance policy should be adopted to remove industrial backwardness.
15) Foreign exchange reserves and the balance of payment position should be favourable to develop industrial sector.
All above factors are causing industrial backwardness. Backwardness is not bad but remaining backward is so bad. So, Pakistan is needed to make industrial development through:
Ø Use of advanced technology
Ø Development in infrastructure
Ø Provision of credit facilities
Ø Increase in industrial consultancy firms
Monday, 23 April 2012
Posted by Ahsan Khan
The total major countries of the world are 182 out of which only 34 are developed and remaining 148 are under developed. Developing Country (DC) is a nation which, compare to developed nations, lacks industrialization, infrastructure, developed agriculture developed natural resources, and suffers from a low per capita income as a result. Developing countries and developed countries are differentiating on the bases of self-esteem, freedom of choice and influence of externals. A country where the average income of the people is much lower than that of developed countries, the economy depends upon a few export crops and where farming is conducted by primary methods is called developing country. Rapid population growth is causing the shortage of food in many developing countries.
Developing countries are also called under-developed nations (UDN) or the South. Most of them are in Africa, Asia and Latin America.
According to Prof. R. Nurkse:
“Under developed countries are those which when compared with the advanced countries, are under-equipped with capital in relation to their population and natural resources.”
A group of industrialized nations including Australia, Austria, Canada, France, Germany, Italy, Japan, the UK and the United States. In some contexts such countries are collectively called the North.
According to Kofi Annan, former Secretary General of the UN:
"A developed country is one that allows all its citizens to enjoy a free and healthy life in a safe environment."
Definitions of Developing Nations:
- According to United Nations Experts:
“A developing country is that in which per capita income is low when compared to the per capita incomes of U.S.A., Canada, Australia and Western Europe.”
- According to Prof. R. Nurkse:
“Under developed countries are those which when compared with the advanced countries, are under-equipped with capital in relation to their population and natural resources.”
- According to Michal P. Tadaro:
“The under developed country, is that which has low levels of living (absolute poverty, poor health, poor education and other social services), low self esteem (low respect, honour, dignity) and limited freedom (freedom from external influence and dominance, freedom of choice etc.).”
Criteria to an Under-developed Nation:
Ø Potential to become economically developed.
Ø Low or no rising trend of per capita income.
Ø Countries very poor in resources.
Prof. Harvey Leibenstein, in his “Economic Backwardness and Economic Growth” divides these characteristics into four categories:
Following are the economic characteristics of UDC’s:
1- General Poverty and Low Living Standard
Poverty cannot be described, it can only be felt. The most of the less developed countries (LDC) are facing the major problem of general as well as absolute poverty and low standard of living. Most of the people in developing nations are ill-fed, ill-housed, ill-clothed and ill-literate. In LDCs almost 1/3 population is much poor. But in Pakistan, 21.0 % population is living below poverty.
2- Burden of Internal and External Debts
Under developed countries (UDC) are loans and grants receiving nations. Most of the developing countries of the world are depending on foreign economic loans. An amount of foreign loans is increasing as the years pass. Their foreign trade and political structure is also dependent on the guidance of foreigners. The outstanding total public debts are Rs. 10020 billion (55.5 % of GDP) and the value of external debts and liabilities is $ 59.5 billion and its services charges are $ 7.8 billion in 2010-11 in Pakistan.
3- Low Per Capita Income
Due to low national income and huge population growth rate, per capita income in developing countries is very low. At constant prices (Base Year 1959-60) per capita income of Pakistan was Rs. 985 and according to the Economic Survey of Pakistan 2010-11 per capita income of Pakistan is $ 1254.
4- Over Dependence on Agriculture
61% Population of Pakistan is living in more than 50,000 villages. Backward agriculture is the major occupation of the population. Agriculture sector is backward due to old and traditional methods of cultivation, in-efficient farmers, lack of credit facilities; un-organized agriculture market etc. 66.7% population is directly or indirectly depending on agriculture sector in Pakistan. It contributes to GDP 20.9 % while in advanced nations it is less than 10 %. It employed 45.0 % of labour force while it is less than 5 % in developed countries.
5- Backward Industrial Sector
Backward industrial sector is an additional feature of under developed countries. Industrial sector of Pakistani economy is backward since independence. Pakistan got only 34 (3.7 % of total industrial units) industrial units out of 921 units in sub-continent in 1947. Small and backward industrial sector is based on low level of capital formation, technology, training and education and over dependence on agriculture sector. 13.2 % labour force is attached with industrial sector in Pakistan. Its share to GDP is 25.8 % and to exports is about 60 %.
An outstanding problem of developing countries is their high rate of un-employment, under-employment and disguised-unemployment. More than 3.05 million people are unemployed in Pakistan. There is 16 % underemployed and 20 % disguised unemployed of total labour force. Unemployment rate is 5.6 %; it is mainly due to high population growth rate, which is 2.1 %.
7- Low level of Productivity
The productivity level is very low in under developed countries as compared to developed countries. Low level of productivity is due to economic backwardness of people, lack of skill, illiteracy and ill-training. Value of annual productivity of labour is about $ 100 while it is more than $ 2500 in advanced nations in Pakistan.
8- Deficit Balance of Payment
Third world countries have to import some finished and capital goods to make economic development, on the other hand they have no products to export but raw material. During July-March, its exports were $ 24 billion and imports were $ 32.3 billion In case of Pakistan. So, its deficit balance of payment was $ 8.3 billion in 2010-11.
9- Dualistic Economy
Dualistic economy refers to the existence of advanced & modern sectors with traditional & backward sectors. Pakistani economy is also a dualistic economy as other developing countries on the following grounds: Co-existence of modern and traditional methods of production in urban and rural areas, Co-existence of wealthy, highly educated class with a large number of illiterate poor classes and Co-existence of very high living standard with very low living standard.
10- Deficiency of Capital
Shortage of capital is another serious problem of poor nations. Lack of capital leads to low per capita income, less saving and short investment. Domestic saving is 9.5% of GDP and total investment is 13.4% of GDP in Pakistan. Rate of capital accumulation is very low as 5%. On the other hand, capital output ratio (COR) is very high which is not desirable for economic development.
11- In-appropriate Use of Natural Resources
Mostly there is shortage of natural resources in developing nations and this is also a cause of their economic backwardness. Natural resources are available in various poor countries but they remain un-utilized, under-utilized or mis-utilized due to capital shortage, less efficiency of labour, lack of skill and knowledge, backward state of technology, improper government actions and limited home market. Natural resources contribute to the GDP about 1%.
12- Market Imperfection
Market is imperfect in accordance with market conditions, rules and regulations in the most of developing nations. There exist monopolies, mis-leading information, immobility of factors; hoarding and smuggling etc. that cause the market to remain imperfect.
13- Limited Foreign Trade
Due to backwardness, developing countries have to export raw material because the quality of their products is not according to international standard ISO etc. Lower developing nations have to import finished and capital goods. Imports of Pakistan are $ 32.3 billion and exports are $ 24 billion that cause into unfavourable balance of payment.
14- Vicious Circle of Poverty
According to vicious circle of poverty, less developed nations are trapped by their own poverty. Vicious circle of poverty is also applied in case of Pakistani economy. Due to poverty, national income of Pakistan is low which causes low saving and low investment. So, rate of capital formation is very low results in “a country is poor because she is poor”.
High rate of inflation causes economic backwardness in poor nations. Due to high level of price, purchasing power, value of money and saving of the consumers tend to decrease. Rate of inflation (CPI) is 14.1% in 2010-11 in Pakistan.
Following are the demographic characteristics:
16- Backward Population Explosion
Another common feature of lower developing nations is population pressure due to high growth rate and reduction in death rate. Population of the Pakistan is 177.1 million with the rapid growth rate of 2.1 % and death rate 0.73 % in 2010-11. Pakistan is at 6th number in the list of the most populous nations. Basic needs like food, clothing, housing, education, sanitations and health facilities are not available for the huge portion of population in these countries.
17- Poor Health and Diseases
M. P. Todaro in his “Economic Development” states, “Many people in developing countries fight a constant battle against malnutrition, diseases and ill health”. Average life expectancy in Pakistan is 66.04 year against 78 years in developed countries. One Doctor is for 1222 persons and one Nurse is for 2369 persons, number of hospitals is 972 and one hospital bed is available for 1701 persons. The total expenditure on health sector is just 0.23 % of the GDP.
There is too much pollution in poor countries. On the one side huge existing population is not provided basic facilities of life, like sanitation, clean water, infrastructure etc. but on the other side due to rapid population growth, industrialization and transportation air, water and earth pollution is increasing. Industries are causing pollution because of non-installation of treatment plants. Number of continuous air pollution monitoring stations is only 7 in Pakistan. Pakistan is at number 29th at the chart of the most polluted nations and at number 6th in Asian countries.
19- Brain Drain
An outflow of the best, brightest and talented student from poor nations to rich nations is called brain drain. There is less reward for the talent, which causes an outflow of best brain in the backward countries. Reward is not paid in accordance with the capability, skill and efficiency in less developed countries.
20- Inadequate Infrastructure
Adequate infrastructure is needed which is not available in poor economies to enhance the process of economic development. Roads, transport, telecommunications, sanitation, health and education facilities are not at their best level in these nations;. Government has reserved an amount of Rs. 133 billion to develop the infrastructure.
Following are the cultural and political characteristics of LDC’s:
21- High Degree of Illiteracy
Illiteracy rate is very high in poor countries while it is almost zero in rich countries. There is lack of technical education and training centers, which is necessary for economic growth and development. Literacy rate in Pakistan is 57.7 % during 2010-11. Expenditure on education sector is just 1.8 % of GDP.
22- Low Level of Organization
There is absence of developed minded leadership in economic activities in third world nations. Decision making power of entrepreneur is very low due to illiteracy, less training and backward techniques. Most of educational institutions are producing employees rather than employers.
23- Low Self-esteem
There is less respect, honour and dignity of people in the lower developed countries. People are honoured due to their powers, relations and castes instead of capabilities. There is poverty, poor health, poor education and shortage of other social services. Government and population of poor countries are under the external influence.
24- Un-productive Expenditures
Population mostly copies the styles of population of developed nations due to demonstration action in poor economies. Their consumption activities not only move around their income but also depend upon the relatives, friends and locality. They spend more on birth, death, marriages and various other ceremonies etc. which reduces their savings and investment.
25- Political Instability
There is political instability in the most of the developing countries. There are a lot of clashes between government and the opposition that is a cause to reduction in domestic as well as foreign investment. Political instability keeps low the level of economic development.
26- Influence of Feudal Lords
The poor class is under the influence of feudal lords and tribal heads in lower developed nations,. The feudal lords want to keep the people backward and do not appreciate the development of the poor. About 50.8% poor borrow from landlords and 57.4 % poor are working for feudal lords without wages in Pakistan.
27- Unproductive Use of Funds
The unproductive expenditures are rising day by day in developing countries like Pakistan due to socio-economic and administrative reasons. During the year 2009-10, Rs. 343 billion were spent for defence. About 75 % of the budget is spent on defence, administration, repayments of loan and interest charges in Pakistan.
28- Govt. Control by Wealthy Persons
Wealthy persons, landlords and elite class not only control the government but also they have full control over all the major sectors of the economy in poor countries. This rich class is not interested to solve the problems of the poor for their welfare but they make government policies for their own improvement.
29- Frequent Changes in Fiscal Policy
Revenues and expenditures policy of government is not stable in developing countries. Government has to change the fiscal policy according to the will of its own people. Industrialists are the main controller of the government and they adjust the fiscal policy in accordance with their own benefits.
30- Violation of Law and Order
Law and order conditions are at their poor stage in Pakistan like other developing countries. A huge portion of saving of people is wasted in costly and lengthy legal process. As in case of Iftikhar Muhammad Chohdery (CJP), he himself has to wait for justices for a long period.
Following are the technological and miscellaneous characteristics of developing countries:
31- Backward State of Technology
Use of modern techniques of production is not adopted in developing countries. It may cause further unemployment. Use of advanced technology is impossible due to shortage of capital, lack of skill and training, high cost of production and lack of foreign exchange reserves. Backward state of technology is results in low production, high cost and wastage of time.
32- Social Aspects
Under developed countries have also some factors such as joint family system, caste system, cultural and religious views, beliefs and values that badly affect their economic development. 32.17 % population is working population and remaining 67.83 % population is depending on them in Pakistan.
33- Un-fair Wealth and Income Distribution
There are not only regional inequalities in developing countries but also wealth and income inequalities. There is unfair wealth and income distribution in less developed nation. 20 % extremely rich population has 50.02 % of national resources, while 20 % poorest population has just 6.37 % of national resources in Pakistan. The difference between rich and poor is increasing day by day.
34- Lack of Experts and Skilled Persons
People have to move abroad for advanced study due to illiteracy and lack of training institutes. They adjust them in foreign countries due to low remuneration and less self-esteem. So, there is scarcity of experts, skilled and trained staff that causes the poor nation to remain backward.
35- Dependence on External Resources
The international trade, political activities and other economic activities are under the influence of other advanced countries in less developing countries. Their development plans are financed by the loan giving countries; these plans are made to serve the interests of foreign countries. So, poor nations are loans and grants receiving nations.
We conclude that all above characteristics are unfavourable for the developing economies. These features are obstacles in way of economic development. All these features are cause of low rate of capital formation, poverty and creation of vicious circle of poverty.
Posted by Ahsan Khan
Collective increase in the supply of money, in money incomes, or in prices refers to inflation. Inflation is generally thought of as an undue rise in the general level of prices.
“Inflation is a situation whereby there is a continuous and persistent rise in the general price level.”
According to Meyer:
“An increase in the prices that occurs after full employment has been attained.”
According to Ackely:
“A persistent and appreciable rise in the general level or average of prices.”
According to Crowther:
“In the state of inflation the prices are rising i. e., the value of money is falling.”
According to Coulbourn:
“In inflation, too much money chases too few goods.”
Situation in Pakistan:
Today, inflation is one of the serious problems faced by Pakistan. Rate of inflation in Pakistan is very high. According to economic survey 2009-10, its rate is 13.3 %, while it was 22.3 % in last fiscal year. According to ESP 2011-12, rate of inflation (CPI) is 10.8%.
All above definitions are showing that inflation is a condition in which prices rise and money value decreases. Due to inflation the real value of money i. e., the purchasing power decreases.
TYPES OF INFLATION:
Following are the main types of inflation, which are different from one another due to their causes:
1) Demand Pull Inflation
This is demand side inflation. It simply means that when there is an increase in aggregate demand. Without any corresponding increase in aggregate supply the price level will rise.
2) Cost Push Inflation
It is supply side inflation. If there is increase in prices it will results in fall in aggregate supply. It is the reason of increase in cost of production.
3) Structural Inflation
Sometimes prices rise in an expanding economy because the supply cannot keep up with rising demand because of structural inflexibilities. This is also called the Structuralist Argument for inflation.
4) Imported Inflation
In such inflation local governments are helpless; it is due to an increase in the prices of imported goods. To control it government may bans the imported items.
5) Open Inflation
If there is no control over rise in prices, it will be determined by free forces of demand and supply.
6) Suppressed Inflation
If prices are subject to governmental control then their increase is made by the government action.
7) Ex-ante & Ex-post Inflation
Ex-ante inflation is the expected inflation and ex-post is the actual inflation. For example, if people of Pakistan expect an inflation rate of 10% it will Ex-ante inflation but actual inflation is 7 % it will be ex-post.
8) Anticipated Inflation
If the actual rate of inflation is perfectly in accordance with the people’s expectations it is called anticipated inflation.
9) Unanticipated Inflation
If the actual rate of inflation is not according to the people’s expectations, it is called unanticipated inflation.
10) Profit Inflation
Profit inflation is the result of the greed of businessmen. It usually occurs in such economy, which are dominated by monopolies.
11) Deficit Inflation
Government has to borrow form banks and non-bank & internal and external resources in case of deficit financing. It also caused inflation named as deficit inflation.
12) Devaluation Inflation
Devaluation also leads to inflation. Devaluation decreases the purchasing power of our currency that results in inflation.
13) Ceiling Inflation
Inflation that occurs due to various prices ceiling enforced by government. Price ceiling are set by government to maintain prices of certain essential goods at a determined level.
14) Income Inflation
If there is an increase in income of the people, it will increase the money supply in the country that leads to income inflation.
DEGREES OF INFLATION:
Inflation contains the following degrees:
1) Moderate Inflation
When the rate of inflation is very low, say in the range of 1% to 20%, it is moderate inflation.
v If its rate is less than 5 %, then it is creeping inflation.
v If its rate is more than 5 %, then it is called trotting inflation.
2) Galloping Inflation
When the rate of inflation exceeds 20 % it is called galloping inflation. The upper limit of galloping inflation may roughly be defined as 1000 %.
3) Hyper Inflation
If the rate of inflation is above 1000 %, it can be termed as hyper-inflation.
Causes of inflation are of two types:
A. INCREASE IN DEMAND:
1) Increase in Money Supply
The major cause of increase in the price level is an increase in money supply. It may be due to increase in currency or credit money. Increase in the stock of money induces people to demand more and more of goods and services.
2) Increase in Velocity of Money
According to the Fisher’s Quantity Theory of Money, if there is an increase in the velocity of circulation of money it also leads to inflation.
3) More Investment
Investments also play an important role in producing inflation. At the moment of investment the economy’s stock of wealth and money expands and it result is in inflation.
4) Non-productive Expenditures
Government of Pakistan has to make a lot of non-productive expenditures like defence etc. Such unproductive expenditures lead to the wastage of economy’s precious resources and also lead to inflation.
5) Corruption & Black Money
Corruption and black money leads to increase in aggregate demand, which is cause of inflation. These evils increase aggregate demand and import volume.
6) Deficit Financing
Deficit financing is another cause of inflation. It increases the money supply and leads to inflation.
7) Foreign Remittances
Increase in foreign remittances is increasing the money supply in our country. Increase in money supply leads to inflation.
8) Foreign Aids
Foreign aids are also a source of mobilization of resources form rich countries to poor countries. It is also a cause of inflation in Pakistan.
9) Consumption Trends
Due to demonstration effect people of our country want to copy the styles of people of rich countries. In this way there is an increase in consumption trends that leads to inflation.
10) Population Bomb
Population of Pakistan is increasing day by day. Increasing population is demanding more and it creates inflation.
B. DECREASE IN SUPPLY:
11) Slow Agricultural Development
Low growth rate of agricultural sector caused in shortage of productivity. It results in low supply and increase in price level.
12) Slow Industrial Growth
Our industrial sector is not at developed form due to use of backward techniques of production. Its less production also creates shortage in market and caused in inflation.
13) Increase in Wages & Salaries
Now labour is demanding more wages and salaries. Increase in wages and salaries leads to increase in cost that increases the prices. On the other hand due to more wages and salaries there is an increase in income and it caused in inflation.
14) Increase in Prices of Imports
Increase in the prices of imports also leads to creation of inflation. If there is an increase in the prices of oil and other imported raw material then it will cause to reduction in supply.
The value of our currency is decreased due to devaluation. It makes imported goods more expensive and it leads to shortage of supply.
16) Indirect Taxes
The imposition of indirect taxes is a reason for increase in prices. Sometimes government imposes taxes on some particular commodities. In this case producer may start to decline the production of those goods.
Following measures are suggested to control high inflation:
1) Increase in the growth rate of output
2) Government should control the supply of money through effective monetary policy
3) Highly increasing unproductive expenditures must be control
4) Government should check the corruption first to eliminate the inflation
5) Control on population is also necessary to control inflation
6) Reduction in budget surplus
7) Reduction in monetary expansion
8) Effective tax system will be helpful to control the inflation
9) Improvement in balance of payment
10) Developments of agricultural and industrial sector will helps to control the inflation.
Following are GOOD EFFECTS of inflation, if rate is 2% to 4%:
1) There is increase in production due to inflation.
2) Inflation increases the employment opportunities in the country.
3) Inflation enhances the process of economic development.
4) There is more investment in country at the time of inflation.
5) Inflation increases the economic activities that may cause to inventions and innovations.
6) Profit of the producers also increases when there is normal inflation.
Following are the BAD EFFECTS of inflation:
1) It is a huge problem for employees, taking fixed salaries.
2) It generates unfair distribution of income and wealth.
3) Inflation reduces the saving of the population.
4) It is a cause of unfavorable balance of trade and payment.
5) Inflation increases the rate of interest.
6) It creates a lot of social evils.
7) It is difficult for consumers to purchases more goods.
8) It generates very bad effects on the poor labour force.
9) Inflation reduces the living standard and purchasing power of people.
10) It is harmful for creditors.
11) Inflation reduces the purchasing power.
Inflation is everywhere in an economy. Its rate is high in developing countries and is low in poor developed counties. Effective operation of monetary and fiscal policy is essential to control the inflation.
Posted by Ahsan Khan